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The Wrap: Oz Dollar, Radiology & Retailers

Weekly Reports | May 31 2019

Weekly Broker Wrap: Australian dollar; radiology; chemicals; aquaculture; food retailers; department stores; and telco/fibre infrastructure.

-Potential for substantial weakness in Australian dollar exists
-SaaS models underpin heightened interest in radiology services/informatics
-Downside risk for Incitec Pivot and Nufarm amid inclement US weather
-Australian salmon market expected to be balanced in FY20
-Woolworths and Coles best positioned to leverage competitive advantage via digital
-Traditional department stores need to cut costs or lift productivity
-Telco/fibre infrastructure sector retains high strategic value


By Eva Brocklehurst

Australian Dollar

The Australian dollar has dropped below US$0.70, the trough ANZ analysts had previously forecast for this cycle. The global outlook has deteriorated and this no longer provides a buffer to the inevitable reduction in Australian cash rates. Hence, the trough in forecasts is lowered to US$0.65. ANZ analysts had expected US/China trade tensions would ease and improve the external outlook but this is escalating and the likelihood of a resolution is diminished.

Hence, the potential for substantial weakness in the Australian dollar exists. Recent indicators have shown there is a risk Australia's unemployment rate will rise and that the cash rate is likely to be 1% by the end of 2019. As a result the yield structure on the Australian dollar has significantly changed. While two reductions to official interest rates in the next 12 months are largely priced in, the analysts do not believe this will stall the decline.

External conditions will be the next catalyst for weakness. The analysts believe the recent run of disappointing US data is an issue for risk appetite rather than for the US dollar. An environment of weaker growth and heightened uncertainty suggests the Australian dollar should decline further.


There has been a significant increase in the price and turnover for a number of ASX-listed companies with direct exposure to radiology services/informatics. A contributing factor, Morgans believes, is interest in the use of software-as-a-service (SaaS) revenue models, which create a trackable metric that can be ascribed value, among others such as profitability and gross margins.

The long-term drivers of this include artificial intelligence, ageing populations, a focus on better patient outcomes and regulatory requirements for centralised records. Global market estimates for medical imaging analysis software, the broker cites, were around US$2.4bn in 2016, expected to be growing at an 8% compound rate through to 2024.

Morgans highlights four companies with direct radiology exposure on which it is keeping a close eye. These include Pro Medicus ((PME)), Volpara ((VHT)), ImExHS ((IME)) and Mach7 ((M7T)). Strong growth, at Pro Medicus and Volpara in particular, has a number of years to play out.


Wet weather and a switch to soy from corn plantings, as well as insurance pay-outs, are resulting in lower urea demand in the US and JP Morgan believes this is negative for Incitec Pivot's ((IPL)) Dyno Nobel Americas business. Total corn and soybean plantings as of May are below historical averages and present downside risk, if weather worsens, for Nufarm ((NUF)) as well.

The broker also notes diammonium phosphate prices, currently at US$375/t in India, are being supported by a drop in Tampa ammonia prices, with margins benefiting by around US$24/t.


Tight supply domestically and strength in demand have supported high prices in the salmon industry. Credit Suisse expects the market should remain balanced in FY20, assuming Tassal Group ((TGR)) keeps volumes flat, albeit with a higher domestic contribution, and Huon Aquaculture ((HUO)) increases tonnage by around 6000t.

Tassal expects a more gradual growth curve in salmon and this suggests that its FY20 growth will be reliant on prawns. Management's strategy is considered well constructed, although Credit Suisse acknowledges risks to forecasts, given the relative immaturity of the business and timing risk, as the earnings from prawns will be skewed to the second half.

Meanwhile, Huon Aquaculture has experienced earnings volatility recently, although a recovery in harvest volumes should drive a strong recovery. The broker retains Neutral ratings on the stocks for now, inclined to wait a little longer to obtained a better understanding of the risk profile.

Food Retailers

Credit Suisse considers Woolworths ((WOW)) and Coles ((COL)) are positioned to leverage their digital capabilities and establish a competitive advantage in the food retail value chain. Promotional expenditure comprises 20% of the food retail value chain and there are material efficiency gains to be had through targeting consumers with promotional expenditure.

The companies' programs, Rewards in the case of Woolworths and Fly Buys in the case of Coles, provide an unmatched capability that can engage with customers on a unique basis. When linked to vast transaction volumes through the stores digital provides unprecedented data that can be leveraged.

Credit Suisse expects the benefits of cost reductions in digital are likely to be reflected in market share gains by both Coles and Woolworths. In contrast, the independent supermarket sector is likely to lose market share and, as a consequence, so will Metcash ((MTS)). Credit Suisse upgrades Coles to Neutral and retains a Neutral rating on Woolworths. The broker downgrades Metcash to Underperform.

Department Stores

UBS takes a wide-angled view of Australian department stores to assess the outlook. The broker concludes the discount department stores still resonate with customers and have an opportunity to lift share. This is less the case for traditional department stores. Their online business will grow but this will take time as purchase intentions are weak and, the broker notes, purchase frequency on Amazon remains low

 While local department stores also have potential to improve margins they need to cut costs or lift productivity, with the former being the larger opportunity. To grow profit, high fixed cost bases need to be cut or sales per square metre lifted. This can be improved, in the broker's view, by space consolidation and also improving the engagement with consumers. UBS has become more positive about Big W (Woolworths) and Kmart/Target ((WES)) but remains cautious about Myer ((MYR)).

In terms of fashion, the broker's study found consumers were positive about the Amazon shopping experience but cited a lack of "touch/feel" and limited ranges as key impediments to shopping there. This suggests Amazon's expansion in the fashion segment will take time. Perception and awareness of Super Retail's ((SUL)) Rebel brand and City Chic ((CCX)) were positive, while the apparel brands belonging to Premier Investments ((PMV)) were more mixed.

Telco/Fibre Infrastructure

Morgan Stanley believes recent M&A activity in the telco/fibre infrastructure sector highlights its strategic value and supports an Overweight rating for both Vocus Communications ((VOC)) and Superloop ((SLC)). The broker suspects interest from private equity and infrastructure investors in these assets highlights underlying strategic value. Both companies have received indicative bids in the last month.

Morgan Stanley considers fibre assets are attractive as they are leveraged to structural growth from data consumption, while there are high barriers to entry because of capital intensity. Other positive factors include recurring revenue, higher margins from vertical integration and lower competition, compared with consumer telco assets such as mobile & broadband in Australia. Morgan Stanley suggests both companies can increase enterprise market share organically, driving earnings/returns higher and leveraging their unique fibre assets.

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